Where credit isn’t due

4th December 2017

It matters little how great a business idea might be; how impressive the business plan for it is – for unless an entrepreneur can get enough capital behind it, it’s never going to get out of the embryonic ‘ideas’ stage.

The grave yard for good business ideas that died in gestation is huge; and in the vast majority of cases the cause of death was cash starvation. In short, the parents of these business brainchilds were unable to access vital funding and had to let them die.

Development and initial operating capital – whether from banks, venture capitalists or elsewhere – is how most new business ideas are nourished. But for that to come available, certain conditions need to be in place. Primarily, these are: (a) established legal rights of borrowers and lenders in secured transactions, and (b) the ready availability of credit information.

In short, those economies where legal rights are stronger and credit information is deeper will provide a better environment in which to foster and develop new business. So, how does the Philippines do in this area?

For the answer to that we turn to the section, ‘Getting Credit’, in the World Bank’s 2018 Doing Business report. For our purpose here, we’ve extracted the global rankings of the 10 Association of Southeast Asian Nations (Asean) states from the 190 countries world wide covered by the report.

And here’s what we found. Brunei, 2nd; Cambodia and Malaysia, equal 20th; Singapore and Vietnam, equal 29th; Thailand, 42nd; Indonesia, 55th; Laos, 77th; Philippines, 142nd; Myanmar, 177th. So, the Philippines comes next to last, and a long way behind everyone else in the Asean region apart from a frontier economy which, in any real sense, didn’t start opening-up until 2011 – just six years ago, when economic and political reforms started to take root.

Can there really be any excuse for that? How can Cambodia, and even Laos – in practice both communist one-party states – leave the Philippines trailing in an indicator, credit, that’s a cornerstone of capitalism? The same goes for Asean joint-third-ranked Vietnam. Where did ‘Getting Credit’ in the Philippines go so wrong?

The answer is it didn’t go wrong; it was never there in the first place – at least not comprehensively, and not for new business without corporate or political connections. In the Philippines, new borrowers, like the lenders, have little access to the sort of credit information that’s normally available through credit bureaux and credit registries. Similarly, absence of, or inadequacies in, collateral and bankruptcy laws leave both sides wary.

If we go a little deeper into the World Bank’s analysis, we can see more clearly what’s gone wrong. Here are the points which each of the Asean states scored in two indicators for ‘Getting Credit’.

In stark statistics, there’s the story – last place and next to last place. Little wonder, with results like that, that the Philippines has struggled to build a vibrant entrepreneurial sector. Little wonder, too, that investment in the Philippines – both domestic and foreign – traditionally bypasses that sector.

Strength of legal rights determines the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitates lending. Depth of credit information assesses the rules affecting the scope, accessibility, and quality of credit information available through public or private credit registries. Credit funding can’t happen without that information.

So how can this matter be addressed? In a word, reform. One of the oddest things about the Philippines is that nearly everyone’s a lawyer. We’re exaggerating of course, but we’re sure you know what we mean – lawyers aren’t exactly a rare breed in the Philippines.

The point is, though, with such an overflowing of legal ‘talent’ – not least in corporate law – you would expect by now that the Philippines would have among the finest and most efficient legal systems in the region, instead of one of the most cumbersome, opaque and arcane.

Somewhere within the government bureaucracy – the country’s biggest-by-far employer, comprising some 1.5 million faceless civil servants spread across 186 departments, agencies and other offices – there must be someone who could be assigned to produce a plan that would get legal rights in the Philippines at least on a par with Thailand and Vietnam.

With regard to deficiencies in reporting credit information, this has to be laid at the door of the government-owned-and-run Credit Information Corporation (CIC) whose job it is to collect, collate and disseminate credit information. Any inadequacies or shortcomings in the system are the CIC’s responsibility. And as the Philippines’ score clearly shows, the system is weak.

Establishing credit bureaux, however, hasn’t exactly been a Philippine priority – in fact, it wasn’t until 13 March last year that the first four of these were introduced. And yet, the first reading of a draft Senate Bill – “An Act Establishing a Credit Information Bureau System” – took place all the way back, on 30 May 2005.

The Credit Bureau of Singapore has been going since 2002; Malaysia has operated a credit bureau since 2008; Thailand’s first credit bureau was launched in 1999; Indonesia established a credit registry in 1988; the Credit Bureau of Brunei set up in 2010.

There are really no excuses for the Philippines doing so badly in the area of ‘Getting Credit’ – just reasons. And, unfortunately, they’re the all-too-familiar ones – lack of transparency, lack of will, lack of urgency, and most probably, lack of understanding of the need for a comprehensible and reliable system – one that can compete with those elsewhere in the region.

3 Comments

True…the old saying goes ” Once you can prove to the bank you don’t need the money…that’s when they will lend it to you”…With the increased amount of capital flowing into the Philippines lets hope things will change…a good idea will find a home

The bank maintain a small amount of percentage for loan to the very select person whom the think can pay back to the bank most of their customer are big real state companies in the city how about those in the province who are in agriculture sector who feeds the people in the city by neglecting them how can the rural dwellers cope up with seeking a loan from the bank when their target really was highly urbanized cities and neglecting people in the countryside maybe the BSP should think of a way that banks that lend money to the provinces will be giving an encentive like minimise corporate taxes from BIR

Central bank has strict monitoring on loans granted by banks, they impose penalties on loans granted which becomes delinquent or which they (Central Bank) termed as “portfolio at risk”. That makes banking business costly. Central Bank also set a certain percentage of delinquency in a loan portfolio, as what I have remembered it was at 5% PAR (portfolio at risk) for the entire loan portfolio of a bank. Because of this Central Bank ruling banks becomes strict in granting loans and who are badly affected are the farmers and small entrepreneurs who doesn’t have the collateral required. Farming is a very risky venture. If you have a bad crop you cannot recover even a single Peso from the entire capital of that crop. If that capital was acquired thru bank financing then it will add up to the bank’s portfolio at risk which will then be questioned by the Central bank.

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